Really? This Is America's Least Favorite Grocery Store?

I don't know about you, but the grocery store is among one of my few kryptonites. I'm not a huge fan of shopping, so getting in and out of the supermarket quickly is often my goal.

But the truth of the matter is I'm heavily in the minority here, even if quite a few of you are nodding your head in accord. Grocery stores provide basic life necessities, and they're also a major source of consumer spending.

Graph by author. Figures in billions of U.S. dollars. Data source: Statista.

With the exception of 2009, which marked the worst recession the U.S. has seen in seven decades, supermarket and grocery store sales have steadily climbed higher, reaching nearly $547 billion in cumulative sales in 2013, according to Statista. Given that our population is only growing, sans a depression in the U.S., I would suggest this figure will continue to march ever higher.

Running a grocery chain is no easy business However, just because consumers are spending more in total sales on grocery products each year doesn't mean the grocery business is easy in any way. There are a number of challenges supermarket chains face on a daily basis.

To begin with, competition within the grocery sector is fierce. It's no secret that people need to buy food, detergent, toothpaste, and other basic-needs products, so grocery chains have attempted to open your pocketbook by setting up in as many convenient locations as possible. According to Progressive Grocer Magazine, there were a whopping 37,459 supermarkets generating $2 million or more in annual sales in operation last year. This means grocery stores often need to advertise heavily or promote certain items or rewards programs aggressively in order to stand out from the crowd.

Secondly, and building on the first point, margins in the grocery business are razor thin. To consistently attract consumers, grocers have to first get them in the door with what are perceived to be low and/or competitive prices. Unfortunately, a highly competitive and promotional environment often leads to low margins, making the supermarket industry a highly capital intensive, but generally low return business model.

Third, grocers have little control over product pricing, even if it appears that they do. As food and consumer goods costs rise grocers can either choose to absorb these higher costs at a detriment to their gross margin in order to keep customers coming into the store or pass along price hikes to consumers and hope they remain loyal to the brand. With the Food Marketing Institute's data from last year showing that the average supermarket carried 43,844 items, maintaining control over product pricing can sometimes prove practically impossible.

Lastly, debt can be a genuine concern for grocers. Because they're generally working with low margins, free cash to be used for opening new stores can be tough to come by. This is why many grocery chains turn to debt offerings to fund their expansion -- although for some, like SUPERVALU, it can get you in a lot of trouble. Because of debt levels that exceeded $6 billion, SUPERVALU was forced to sell a number of its chains, including Albertsons and Jewel-Osco, to privately held Cerberus last year for $3.3 billion. In other words, not all grocers expand within their means and they sometimes get punished for it!

Differentiating a crowded fieldLong story short, differentiating the winners from the losers in the space can sometimes be difficult.

Luckily for us, research firm Market Force conducted a study last month on the supermarket sector, which reached more than 6,200 respondents and looked at various operational and product attributes for 12 supermarket chains. The goal of Market Force's study was to not only discover what grocery stores shoppers frequented the most, but also to understand which chains excel in customer satisfaction. Chains that go beyond consumer expectations are more likely to forge an emotional bond with consumers and keep them loyal regardless of food and product cost fluctuations. Thus, chains that performed well in Market Force's survey could present an intriguing investment opportunity, while those that performed poorly might make investors think twice.

Topping the list for a second straight year was down-to-earth grocer Trader Joe's, which is owned by privately held Aldi. As Market Force summarizes, "Trader Joe's has amassed a loyal following of shoppers looking for an unconventional grocery shopping experience with a neighborhood feel." Trader Joe's really stood out when it came to service and business sustainability, placing fourth in "low prices," second in "courteous service" and "inviting atmosphere," and tops by a mile in the "natural/organic choices," "good private-label brands," and "sustainable policies" categories.

Costco (NASDAQ: COST) was another solid performer, finishing fourth in Market Force's study. Specifically, Costco ranked highest with consumers for its meat quality, though it also placed in the top five for all other product attributes including "natural/organic choices," "high-quality produce," and "sustainable policies," to name a few. After it also ranked as America's favorite gas station, I'd suggest that Costco's customer loyalty ranks high up the list.

The surprising grocer that's America's least favoritePerhaps the biggest surprise of all is the supermarket that came in dead last of the 12 companies that had enough votes to qualify. Before I reveal which company this is, would you care to venture your own guess?

Did any of the majors like Kroger (NYSE: KR) or Safeway (NYSE: SWY) come to mind? If so, you selected the seventh and 10th best performers, respectively. Safeway's "inviting atmosphere" saved it from the ignominy of finishing last, which is a direct reflection of its costly interior store remodels, while Kroger's "natural/organic choices," "sales and promotions," and "fast checkouts" ranked it among the top five in each category, pulling it to a middle-of-the-pack ranking.

The company pulling up the caboose in Market Forces survey was actually -- drumroll, please -- Wal-Mart (NYSE: WMT) .

Source: Wal-Mart.

I know we don't often think of Wal-Mart as a grocery store, but within the U.S. (and excluding fuel sales), groceries make up 55% of Wal-Mart's total revenue. Add in health and wellness products, which are typically found in every supermarket as well, and you'll see that 65% of Wal-Mart's revenue is tied to these basic-needs items.

Source: Wal-Mart.

So by now you're probably scratching your head and wondering how the largest company by revenue could be America's most hated grocery chain. On one hand Wal-Mart does do a good job of attracting consumers based on price. Of Market Force's 12 reviewable categories, Wal-Mart actually placed third in "low prices" and first in "one-stop shopping." Wal-Mart's size makes it very difficult for smaller businesses to compete since its product selection is unsurpassed, and its size allows it to negotiate hefty discounts when buying products from vendors in bulk. The end result is prices that tend to be far below the industry average.

We also have to consider the demographics that Wal-Mart and this survey targeted. Wal-Mart's bread-and-butter consumer base is the low-income customer which is more attracted by price and less by product or service quality. As Market Force notes in its study, nearly 60% of respondents earned more than $50,000 annually, so that bias could certainly skew the results away from Wal-Mart.

Wal-Mart's trio of troubles However, there are tangible problems with Wal-Mart's business model that have recently come to light. Wal-Mart has delivered four straight quarters of year-over-year same-store sales declines, and it may be on account of competitive online sales growth, dollar-store expansion, and poor company image.

Although not all lower-income individuals have online access or the ability to purchase goods online, websites such as Amazon.com have the pricing clout and lack of overhead costs to compete with and sometimes even undercut Wal-Mart's prices. Plus, Internet sales are considerably more convenient than getting in a car and driving to the store, perhaps with kids in tow. Growing online competition represents a serious concern to Wal-Mart's already shrinking operating margins.

Source: Dollar General.

I'd suggest that the rapid expansion of dollar stores such as Dollar General (NYSE: DG) is also proving to be a thorn in Wal-Mart's side. Dollar stores will never be able to match the product selection of a Wal-Mart superstore, but the mere understanding that consumers know what they'll be paying for a majority of products before heading into the store (i.e., $1 or less) proves to be enough of a lure to drive steady traffic and sales increases. If consumers purely care about one-stop shopping, they'll continue to choose Wal-Mart, but price-conscious customers are likely going to add a dollar store such as Dollar General into their shopping mix as well, which only works to reduce Wal-Mart's growth potential.

Finally, a low public opinion of Wal-Mart is likely a hindrance to its sales. Last year Wal-Mart dealt with international bribery allegations, it's suffered through accusations that it's not doing all it can to be environmentally friendly by purchasing predominantly from overseas vendors, and it's contended for years with labor unions that have claimed its wages and labor practices are unfair or unethical. With few positive opinions to be found, it's difficult for Wal-Mart to forge bonds with consumers beyond heavily discounting its merchandise to attract shoppers into its stores.

It's possible that Wal-Mart's move to open smaller Wal-Mart Express stores could make the brand seem more down-to-earth, especially in smaller towns that tend to have negative views toward large corporations. What is for certain, though, is that Wal-Mart is going to need to remain innovative, because it's clearly not optimizing its consumer reach as of now. Prices alone aren't the only consideration for shoppers, and even a company like Wal-Mart could find itself and its share price struggling if it fails to improve its image with shoppers.

Wal-Mart's image may be suffering, but the potential for this top stock is soaring. Find out how this top stock could leave Wal-Mart in its dust over the next decade! Give us five minutes and we'll show how you could own the best stock for 2014. Every year, The Motley Fool's chief investment officer hand-picks one stock with outstanding potential. But it's not just any run-of-the-mill company. It's a stock perfectly positioned to cash in on one of the upcoming year's most lucrative trends. Last year his pick skyrocketed 134%. And previous top picks have gained upwards of 908%, 1,252% and 1,303% over the subsequent years! You don't want to miss what could be his biggest winner yet! Just click here to download your free copy of "The Motley Fool's Top Stock for 2014" today.

Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment icon found on every comment.

There is another thing often overlooked about Walmart. It is driving itself out of business by placing corner markets and super stores within miles from one another. This means they are running multiple stores competing with one another meaning none of the stores are drawing their true potential and thus often running at little to no profit.

I know it's "hip" to spit on Walmart. Bribery is how you do business in most other countries. Does anyone think Walmart shoppers stopped shopping because of allegations of bribes in China? Same store sales are down because, right now, the low-income shoppers are broke. Walmart employees are paid the same as comparable workers in the area; in my area, many would not have a job without Walmart. I love HyVee, Harps, Publix, the upscale personal service stores, but I can't afford to do all my shopping there, and for routine staples I shop at the Wmart locally. So do most of my neighbors.

It's funny how WalMart is least favorite but most shopped? How does that work? People can say what they want in a survey, but how and where the spend their hard-earned money tells who they really favor.

Personally I prefer to shop at WalMart rather than Albertsons in Silver City NM because the lines are much longer at Albertsons and the employees and manager make it clear that they don't mind making customers wait.

"It's funny how WalMart is least favorite but most shopped? How does that work? People can say what they want in a survey, but how and where the spend their hard-earned money tells who they really favor."

This is why I mentioned the potential bias in Market Force's survey. Wal-Mart is generally catering to low-income consumers, and close to 60% of the survey focused on consumers making more than $50,000. That's likely going to put Wal-Mart at some disadvantage with regard to results and certainly help unique stores where price isn't as much of an objection, such as Trader Joe's.

disgustedman says "My Niece works for a grocery store. They buy those brown and serve biscuits for $0.19 CENTS a pkg and sell them for $0.98 Cents...Not so thin as they'd lead you to believe."

Unless your niece is the store manager, there's no way she knows the cost of items. And there's no way a package of brown-n-serve biscuits have a cost of 19 cents. I have too many years in supermarkets. And you say you won't shop at Walmart, but you don't say why? The FACTS are that Walmart can beat ANYONE ELSE'S prices.

Part of WalMart's problem may be over saturation. In my neighborhood, there are three WalMarts and a Walmart grocery store within about a five-mile radius. I expect this means that they are actually in competition with each other.

Very questionable & blatant hyperbole. That type of vile characterization places anything else you write under deserved suspicion. It is way over the top and I can not believe anything you have written, except for numbers and poll results. Your opinion or speculation on any issue is worthless after making a statement like that. "Hated"??? Indeed, you are a fool .... and then you want me to buy a stock based on your recommendation!!??? I don't think so.

When I was living in Louisiana, Wal-Mart had a great grocery store. Now that I live in Florida, the Wal-Mart grocery is less than satisfactory. The produce section here is horrible. They must be buying the produce that every other grocery chain already rejected. Publix and Winn-Dixie are better.

Walmart is NOT stupid as some of these readers may think. They use the government to their advantage by putting most of their employees on Food Stamps or in Food Pantry's to shore up their incomes. The reason they are building the neighborhood markets is 1. They pay their employee and managers lot less money. 2. they are going to close the super centers which will become same day Walmart.com distribution centers. They already announced the Walmart to Go convenience / gas stations they are planning to build to compete with Seven Eleven and WAWA.

I can't believe this article made no mention of the long checkout lines at Walmart. That is its biggest sin (at least from a customer service standpoint). Many times I have set my items down and walked out because the lines were so ridiculously long.

I buy a little bit of our groceries at walmart. but there is no way I will ever buy fruits and veggies from them. I have watched the stockers fill the bins with rotting products. Unbelievable! Deli workers not using their PPE, whipping their hands on soiled aprons. Insane! It's no wonder that there are E-Coli and listeria outbreaks. It's one thing to have to (legally) post signs for workers to have to wash their hands before returning to work and actually training them on how to wash their hands. Yes there is a proper way to do so.